Long-term care insurance may be bad investment

The Bakersfield Californian
March 31, 2014

A long-time client, who I will call Fred, walked into my office the other day. He was clearly distraught.

In 2010, Fred retired at the age of 65 from the blue-collar government job he had held for 30 years. He receives about $50,000 a year in pension from CalPERS, one of the nation’s largest public pension systems.

Fred also saved for his retirement by participating in his employer’s “tax deferred” savings program and through privately invested accounts. As an extra hedge, Fred bought long-term care insurance when CalPERS offered the coverage in the 1990s.

Like thousands of other CalPERS members, Fred was sold a policy that covered convalescent care, in-home living assistance and other services. Fred said he was assured that his premiums would not increase as he aged, and that coverage benefits would be “inflation-adjusted” for the life of the policyholder.

CalPERS and insurance companies throughout the nation that offered early long-term care policies appeared to have relied on some incorrect assumptions when they set premiums and terms. For example, it turned out that fewer people than anticipated allowed their policies to lapse. And the Great Recession of 2008-2009 reduced investment returns that were expected to cover claims.

Last year, the CalPERS board approved an 85 percent premium hike. The increase is expected to go into effect in 2015. As an alternative, Fred has been offered a greatly reduced plan for a lower premium.

Policyholders have sued, claiming they were misled and that the CalPERS board and managers neglected their fiduciary duty in overseeing the plan. CalPERS, which has stopped selling the policies, has asked the court to throw out the lawsuit, claiming it did nothing wrong, no one has been harmed and insurance laws do not apply to CalPERS.

And that brings us to Fred’s question: Should he continue paying for the coverage? My answer: That depends.

While actuaries and others asked insurance questions disagree on precise savings thresholds, most give this basic advice:

  • If you have little in retirement savings ($200,000 or less) don’t buy it. Likely if you need nursing home care, you will quickly go through that savings and government programs, such as Medicaid, will kick in to provide help.
  • If you have significant savings ($2 million or more) and other sources of income, you may be better off self-insuring. The odds are slim that you will get much in return for what you paid in premiums. Likely you will have enough money to cover your costs.For example, most policies have at least a 90-day “elimination period,” meaning the policy will not begin paying off until after the first 90 days. But insurance studies reveal that about two- thirds of seniors’ nursing home stays are for less than 90 days. And less than 6 percent of the people admitted to nursing homes stay for more than two years.
  • People in the middle – with more than $200,000 and less than $2 million in savings – may have the most to gain from long-term care insurance. The terms of policies can be adjusted to reduce costs and still provide some protection.

But everyone’s circumstances and every long-term care insurance policy is different. Decide on coverage after consulting with a financial planner and insurance broker. Ask: Why do I need the coverage? What will I receive in return? What are the alternatives?